Get an in-depth look at Polkadotdot’s token economy

Polkadot’s interoperable multi-chain architecture brings scalability, security and decentralization to Web 3.0.

Polkadot was developed with the Substrate blockchain framework and designed an ecosystem that complements the existing dApp infrastructure as well as new possibilities for over 400 smart contract development projects, Oracle, NFT, DAO, Bridge, Privacy, Game, IoT, DEX and other DeFi. offers solution on the platform.

The heart of the Polkadot ecosystem is the DOT token, which is not only intended for payments but also supports various functions across the network. What is DOT and how can it be used in blockchains by blockchains?

What is DOT?

DOT is the native token of the Polkadot network, the smallest of which is called Planck.

DOT is also an inflation token, as opposed to the fixed monetary policy of protocols like Bitcoin. This is intended to incentivize the network by automatically adjusting to user participation rates, with a current offering of nearly 1 billion tokens.

In addition to ancillary functions as a transferable token, there are several important uses for DOT across the ecosystem, from governance to staking, parachain auctions and crowdloaning.

Administrative function

Polkadot enables DOT holders to vote with a council and technical committee and participate in network management including billing, parachain connectivity and upgrades.

Active DOT holders can suggest improvements for the network by linking their tokens (depositing a minimum amount on a proposal) within a certain period of time and voting on the proposals of others. Proposals that collect the highest number of supporting affiliate coins will be selected first in each voting cycle. The tokens will then be released when the proposal is voted on.

The Board of Directors is an on-chain entity elected by the DOT Hodler and is responsible for determining which proposals should be continued. You manage the treasury from network fees and represent passive DOT holders in the ecosystem. The technical committee includes the network’s development team to implement the approved proposal.

Every proposal has to go through a referendum for all DOT holders to make the final decision (as a percentage of the stakes).

consensus Nominated Proof-of-stake

DOT is also used to support the nominee proof-of-stake (NpoS) consensus mechanism for Polkadot, which is designed with the role of validator and nominator to maximize chain security. Those interested in maintaining the network can use DOT to operate validation nodes, validate the central relay chain and associated paracets, and participate in the consensus for block rewards in return. The validation bonuses are paid out equally to everyone regardless of the amount used, which creates an evenly distributed validation pool.

Other DOT holders are encouraged to enter as nominees to secure the network by staking DOT and selecting up to 16 top performing validators in exchange for staking rewards. The staking reward will then be distributed proportionally to all stakers after deduction of the validator payment.

DOT staking also serves as a defense and defense mechanism against malicious attacks. Validators are punished with a DOT-Cut for wrongdoing, e.g. B. when they go offline or run modified software. Then both validators and their nominators lose 1% of their associated / stake DOT. The forked DOT is added to the treasury and used as a defined decentralized governance process.

Parachain position auction

Parachains are specialized Polkadot shards that allow transactions to be processed in parallel, most often in the form of a blockchain, by renting one of the few dedicated locations connected to Polkadot’s Relay Chain.

In order for a Parachain project to connect to the Polkadot network, the project must participate in an on-chain candle auction without permission. The highest bidder receives the lease for a certain period of time. Potential parachains bid with DOT and the winner will block this DOT for the duration of the lease, which will be returned after the lease expires and the parachain will be deleted.

Parachain crowdloan

Polkadot also enables potential parachains to have tokens up for auction from the wider DOT holder community. This process is carried out in the form of decentralized crowdfunding in order to spread risk, reduce costs and enable more competitive offers. Accordingly, the community invests collectively and can further decentralize a parachain by sending tokens to participants who are ready to give their DOT to achieve a position.

Anyone can create a crowdloan ad campaign to bid on a Parachain location. This campaign can span multiple auctions without having to start a new campaign if it does not initially win a place.

Every crowdloan campaign has an index and DOT holders can simply submit a special transaction referencing the index to participate. If the crowdloan campaign is successful in a placement auction, the participant’s DOT will also be blocked for the term of the rental agreement and returned when it expires.

The driving force behind DOT holders in the community is that the ability to support their favorite projects and be rewarded by a parachain can be higher than simply staking tokens while maintaining ultimate control over them.

Auctions will take a lot of DOT off the market to support bidding and winning positions. Since Kurura (the first parachain auction on Polkadot’s Kusama network) raised $ 200 million in KSM, it suggests that a polkadot parachain auction is also required.

Game theory begins here. Finally, users can simply choose to receive staking rewards with less risk than participating in crowdfunding. So the Parachain project needs to provide enough incentives to convince users to lock the DOT during the rental period.

However, the ecosystem is always on the move, so the actions of one user affect another and amplify the cycle of behavior. If attendees have an incentive to stake DOT offsets to participate in crowdfunding, fewer DOTs will be staked off DOTs. That means the annual percentage of stake is increased to make up for this. As a result, the demand for DOT increases and the price of DOT also increases.

However, this means that the remuneration for participating in the crowdloan also increases, which leads to a higher demand for DOT, etc. Since the market is constantly balancing between crowd-loan incentives and stake-out bonuses, there will be great competition for DOT between the participants.

Admit strength Blockchain of blockchains

Polkadot put the interests of the DOT-Hodler at the center of its architecture and aimed to develop a protocol that aids in the delivery of Web 3.0. Here users take control, not companies.

Connecting an interoperable multi-chain network while maintaining a fair governance model enabled by DOT enables the decentralized scalability that this rapidly growing ecosystem needs to provide the output value for the blockchain of blockchains.

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